Product and Occupational Liability

Abstract

Litigation over product liability has escalated because of shifting liability standards, and the role of workers' compensation has increased both because of the changing injury mix and the provision of more generous benefit levels. The rise in these costs does not necessarily signal that the systems are in need of retrenchment, since the earlier institutional roles may not have been adequate. However, they do signal a need for reassessment. In the case of product liability, the major shortcoming is that the courts' treatment of design defects is overly ambitious. Regulatory agencies are better suited than the courts in making judgments about design defects, and establishing the role of insurance for all product defects is not feasible. Similarly, in the case of workers' compensation, it is not feasible to have an administrative compensation scheme for all diseases with some possibly remote link to the workplace. The cost of covering all such diseases is simply too great. Moreover, raising benefit levels to provide better earnings replacement is desirable, but additional research is needed to find ways of limiting the problem of moral hazard which appears to be substantial. Economic analysis has an extensive role to play in analyzing liability reform. Litigation behavior accords with an economic model of the bargaining process in which both the plaintiff and defendant behave rationally given the economic stakes involved. Moreover, analysis of the appropriate role of the product liability and workers' compensation remedies hinges on issues that can be examined with the aid of empirical studies. Empirical evidence on workers' compensation suggests that income replacement rates are near the optimal amount, abstracting from the role of moral hazard. Further application of empirical tests to ascertain the optimal level of insurance for specific classes of injuries will further illuminate the key concerns in the tort liability reform debate. Perhaps the main insight economists have brought to the tort liability reform debate is that incentives matter. Workers' compensation costs substantially affect workplace safety, and product liability expenses influence the safety of product designs and the rate of new product introductions. What is missing from this analysis is a determination of the optimal level of safety. Eliminating all risks is not desirable, and we currently have no precise estimates of the direction or extent of the departure from the optimal amount of safety.